Author: Jae-jin Yang, Yonsei University
South Korea has experienced three economic crises since its democratisation in 1987: the Asian financial crisis (1997–1999), the global financial crisis (2008–2009) and the current COVID-19 economic crisis. Like the two crises before it, the COVID-19 economic crisis has given renewed impetus for expanding social welfare support in South Korea.
In response to the Asian financial crisis, the progressive Kim Dae-jung government expanded social security. In 1998 as a result of the crisis, South Korea’s economy contracted by 5.8 per cent and the unemployment rate rose to over 8 per cent. South Korea was not prepared for mass unemployment. The Employment Insurance Scheme (EIS), which had just been introduced in 1995 and initially covered only 4.1 per cent of the country’s 13.6 million employees, was unable to cope. Poverty soared and income equality deteriorated. These dismal social consequences prompted drastic pro-welfare reforms, including coverage expansion of the EIS and the introduction of a universal public assistance program.
This expansion of social security helped South Korea fare better during the global financial crisis. South Korea’s export-oriented economy was strongly impacted by the global financial crisis given its heavy dependence on foreign trade. GDP fell by 3.4 per cent in the fourth quarter of 2008 and 4.2 per cent in the second quarter of 2009. But social problems were not as serious as in the Asian financial crisis. The EIS helped exporting firms maintain employment by providing subsidies to be used for paid leave and the reduction of working hours rather than layoffs. Unemployment benefits and public assistance also worked relatively well.
COVID-19 has presented mixed challenges for South Korea. The South Korean government successfully responded to the health crisis caused by COVID-19. Similar to China, the number of confirmed cases surged abruptly in February 2020 and hit its peak on 3 March with 851 new confirmed cases that day. Daily confirmed cases have since generally declined to as low as around 30 in August and hovering around 100 in September.
This successful response was made possible by massive testing, quarantine of infected patients, tracking of movements and swift isolation of people exposed. Successful containment has mitigated the adverse economic effects of COVID-19 on the economy, which shrank by 3.3 percent in the second quarter of 2020. Most other OECD countries have experienced their worst economic retreats since the Great Depression, with alarming contractions in Japan (27.8 per cent), the United States (33 per cent) and the European Union (12.1 per cent).
Yet the pandemic has managed to reveal flaws in South Korea’s social safety net, especially for those who are self-employed, as social distancing has generated an unexpected ongoing de facto lockdown effect on small businesses. South Korea has a significant small business sector, with self-employment accounting for about 25 per cent of total employment. But these self-employed workers are not covered by the EIS and are also not usually eligible for public assistance as asset holders.
Protecting these small business owners from disastrous loss has become an urgent new policy agenda item.
Two policy alternatives are being discussed. One option is a universal basic income, touted by presidential hopeful and Gyeonggi Province Governor Lee Jae-myung. The other option is the expansion of the EIS in two ways. The first way is to substitute the EIS with a Danish-style unemployment insurance system based on an individual’s total income regardless of employment type. The self-employed and freelancers would be obliged to enrol in this system. The second way is to provide German-style unemployment allowances to the uncovered on the condition that they engage in job searching or training.
Proponents of the universal basic income succeeded in introducing a variant of such a policy, the Emergency Relief Allowance (ERA), for the entire population during the April 2020 general election that took place amid the COVID-19 crisis. The ERA was initially proposed by the government to protect those not covered by the EIS. But escalation in bidding among ruling and opposition parties eventually led to a universal ERA covering the entire population.
As part of the ERA, the government paid out 1 million won (US$900) to households with four members and 400,000 won (US$350) for single-person households in May. It was the first time in South Korean history that the government provided benefits regardless of social risks and needs. The one-time ERA cost 14.3 trillion won (US$12 billion) — far exceeding the total unemployment benefit outlay of 9 trillion won (US$7.6 billion) in 2019.
Supporters of a strengthened EIS criticise the ERA as borne out of populism and an inefficient safety net for the self-employed. The ERA of 400,000 won (US$350) for single-person households is just a fifth of the monthly unemployment benefit.
After the election, the South Korean government distanced itself from the ERA as a universal basic income. The second ERA, to be paid out late September, has been revised as selective benefits to uncovered small business, irregular workers and freelancers who have been hard hit by the prolonged economic recession. The government also passed a law to provide means-tested unemployment allowances for six months to job seekers who are not covered by the EIS.
The government is now preparing a roadmap for a universal employment insurance scheme by which all people engaged in economic activities can file for unemployment benefits if they have lost income. Whether it would follow the Danish or German system is yet undecided. What is clear is that COVID-19 has exposed a weak point in the South Korean social security system and the government is faced with the difficult task of economic crisis-induced reform.
Jae-jin Yang is Professor in the Department of Public Administration and Director of the Institute for Welfare State Research at Yonsei University.
This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.